The pendulum is swinging toward customer retention as a business imperative.
Given the pressure on enterprise valuations (how much your company is worth to prospective buyers) and higher interest rates, companies are cutting back on people and infrastructure that isn't directly tied to their 12-24 month strategy.
Here are some of the harsh realities customer success leaders are facing in 2023 as a result:
- Companies will seek to consolidate and cut unnecessary tools from their tech stack as budgets tighten.
- Procurement and finance will pressure vendors to reduce subscription costs at renewal or risk being replaced with a lower-cost solution.
- Sponsors, champions, and users of your products will be laid off, putting product adoption and value at risk.
- Your customers' companies will be bought by their competitors and synergized.
These headwinds against retention will drive churn higher over a period in which the same pressures will affect new logo sales.
Even if that wasn't the case, new logo sales are also incredibly capital-intensive.
According to the 2021 Pacific Crest Survey (link below), a customer's median CAC payback period on a gross margin basis is 26 months. This means that every new dollar of ARR costs the business somewhere between $1.50 and $2.10 to acquire.
With the focus on efficient growth, it's clear that new business alone won't suffice.
What does all of this mean for customer success?
Well, it turns out that while most customer success teams claim to align with net revenue retention, there are two significant variants of customer success teams out there which Dave Kellogg explained well in his recent 2023 predictions article:
Those business-oriented CS teams who thought customer advocacy meant generating customers who advocate for the company will continue to thrive. But those checklist-oriented CS teams who thought customer advocacy meant internal advocacy on behalf of customers may well find themselves restructured.
- Dave Kellogg, Kellblog
More often than not, the "checklist-focused" CS teams adopt a white-glove support motion that customers have grown accustomed to utilizing for any need they have.
Have a product question? Call the CSM.
New user to train? Call the CSM.
Feature request? Call the CSM.
Any problem the customer doesn't know how to solve?
Yep, you guessed it. Escalate it to the CSM.
It's difficult to prove the impact on net retention by a checklist-focused cs team, but they do meet the minimum requirement of being the warm, named resource a customer can reach with any issue or concern they have.
In this way, they behave similarly to a high-touch support team, but with one terrifying difference.
Because most of their interactions are tied up in an email and other one-off communication, their work is virtually invisible and unusable to other customers.
What customer needs drive the success team's workload is also unclear because these interactions aren't tracked anywhere.
A CS leader I recently met with described a time and motion study they conducted across their 50-person CSM team. They found that, on average, about 15% of their time was spent answering customer emails.
15% of 50 CSMs' time is over 15,500 hours per year or 7.5 person/years.
And that's just email; many CS teams spend significant portions of time each week on Zoom calls with one customer at a time.
Imagine if only half of that time was spent on more strategic and targeted customer programs.
The way to escape this dilemma is not by hiring more CSMs to do this work but by focusing on the unsexy blocking and tackling that a great company does for its customers.
- delivering a high-quality, stable product.
- providing robust customer support that helps with more than product break/fix issues.
- providing onboarding services that drive rapid time to value with a prescriptive methodology.
- Leveraging customer community-driven enablement, collaboration, and support experiences.
- providing paid professional services that justify (i.e., pay for) one-to-one engagements and drive a higher likelihood of retaining the customer.
- providing shared technical resources that aren't named on accounts but who can consult with customers on critical issues as needed (mostly offered through premium service or support contracts).
Dollar for dollar, these specific investments will pay higher dividends than adding additional "catch-all" customer success managers.
Executives and CEOs would be well-advised to hire experienced specialists to lead, professionalize, and scale these functions.
As the supporting functions mature, it's possible to add business-focused CSMs for account and relationship management, expansion, and advocacy. They provide measurable ROI (against net retention) that is separate and distinct from support, services, and sales.
What investments do you need to make outside of CS to transform your customer success department from checklist- to business-focused?
💡 Weekly Favorites
Here are some of my favorite podcasts, blogs, and videos from the week:
- A thoughtful LinkedIn post by my friend Dave Jackson on the business realities behind layoffs.
- 2023: Year of Customer Success & Gross Churn. A SaaS CFO's take on why customer success is mission critical this year.
- 2021 Pacific Crest Survey - This is a go-to resource for anyone who wants to understand SaaS industry benchmarks across privately held, VC and PE-backed companies.
Enjoy, and I'll see you next week.
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